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PFI: the Economics of the Madhouse

Public Private Partnerships (PPP) is an umbrella term for a range of initiatives involving the private sector in operating public services. The Private Finance Initiative (PFI) is the most frequently used. The key difference between PFI and conventional ways of providing public services is that the asset is not in public ownership. Instead, the public service provider makes an annual payment, like a mortgage, to the private company which provides the building and associated services. Whilst PFI projects are structured in different ways, there are usually four key elements – design, finance, build and operate.

The government uses PFI because costs are spread typically over 25 years; because, it argues, the private sector would be much cheaper and more effective in building and running public sector projects; and because it was calculated that the public would care little about who actually provides public services, just as long as they remained free and available to everyone.

Though the Tories first brought in PFI, Labour has embraced it with a real passion. PFI is now one of the main ways to build and run public sector projects, funding everything from schools and hospitals to roads and the underground. Totally hooked on free market principles, the government has increasingly forced various departments and local authorities to use PFI.

In PFI’s early years government could silence critics by pointing to shiny new hospitals and schools as evidence of success. But as time has passed, and as more and more PFI funded projects have come on stream, its “wonders” have been challenged by an increasing number of highly critical reports. In recent years this has reached the point where even the government’s own auditors have been slamming the performance of PFI.

Criticisms of PFI are many, ranging from cost to quality. For example, an Audit Commission report into PFI funded schools found their quality to be far worse than publicly financed schools. The best examples of innovation came from traditional schools and the cost of services like cleaning and caretaking was higher in PFI schools. The report also criticised poor design in PFI schools, such as small classroom sizes and poor acoustics. A report by the Audit Office in Scotland was equally damning. It found that PFI schools were completed no quicker than state funded schools, that the cost of building and running PFI schools was much higher, and that over a 25 year period local councils would be paying up to five times more than the original investment by the private companies involved.

soaring profits

That PFI is far more expensive than traditional state funded projects should be no shock; after all the state can always borrow money to finance projects more cheaply than the private sector. Another reason why PFI is more expensive is thehuge profits made by PFI companies. The 20% annual profit rate for companies involved in the PFI funded London underground improvements is typical. Another thing pushing up the cost, and the profit margin, is the clever little insurance trick. All the risk in PFI projects comes in the first few years; once the building is completed at cost and on time, there’s very little risk. PFI companies can then renegotiate loans, allowing profits to soar, in some cases by 80%. Another factor driving up costs is the use of advisers and consultants. The first 15 NHS trust hospitals spent £45 million on advisers, a full 4% of the capital value of each hospital.

PFI companies have also boosted profits by driving down wages and working conditions. A Unison report found that in 80% of PFI projects surveyed pay and conditions were far worse than for the already poorly paid workers in the state sector.

To meet the rising cost of PFI schemes local authorities have been forced as divert money from other social provision. In many cases they can’t even pay for staff to work in the PFI funded building. A British Medical Journal investigation found that due to lack of resources there has been a 20% cut in staff in PFI hospitals, badly impacting on the services provided.

You might think that as the problems pile up the government would seek to save face and revert to state funded public provision. But no, the opposite is happening and Labour seems ever more determined to make PFI work.

However, they now face a threat to the whole scheme. PFI has been based on cheap loans but the era of cheap money has ended with the credit crunch and companies are finding it almost impossible to borrow the huge amounts needed for PFI projects. This is putting at risk all of the government’s public sector programmes, like the proposed £40 billion school building programme and the multi-billion pound waste processing and recycling facilities, which must be in place by 2013 to meet EU targets.

no longer viable

The simple answer would be to announce that, due to the credit crunch, PFI is no longer viable and planned public projects are to be state funded. This would allow the government to argue that, not only is it guaranteeing public services, but it’s also providing a much needed boost to an ailing economy. But, in a sign of just how much free market orthodoxy grips the Labour Party, it seems they are about to announce that state funds will be used to prop up PFI.

This will bring us, in a somewhat bizarre circle, to a situation where the government funds companies to build public projects. These companies then charge the state highly inflated prices, with part of the price returning to the government to pay the original loan. This is not only the economics of the mad house; it is yet another example of the state taking all the risk while capitalists make all the profit.

There’s worse to come. Labour’s free market indoctrination is such that it now appears about to renege on its promise that PFI schemes will return to the public sector. The government has made it known that some primary care trusts will remain in private hands after the repayment period. This totally undermines their argument that PFI is not just a more complex method of privatisation.

Should this policy extend to all PFI projects it brings us closer to a point where the vast majority of the public sector will be privately owned and run. The only social aspect left then will be the principle that public sector provision is free at the point of delivery. But there must be doubt as to how long this will last. The very act of privatisation pushes up the cost of public sector provision, putting ever more strain on public finances. Eventually a time will come when it is argued that we can no longer afford the public sector. No doubt it will start with people having to contribute a small amount. This will be a first step in a process leading to full privatisation of public services, only adding to the economic and social inequalities we already have.

It is quite remarkable how Labour has been able to move ever closer to private sector provision of public services in a way that Thatcher could never have. They have been able to disguise their free market polices in the language of fairness and equality to deflect public opposition. This has been achieved only due to the cowardice of the trade unions. Had the unions organised action against privatisation it could have been a focal point for much wider action by the whole population. Instead they restricted themselves to token action while continuing to bankroll Labour’s extreme free market views. As such, how the unions are currently structured means they are part of the problem rather than part of the solution.

That is not to say that union members and activists are part of the problem, rather that active trade unionists must look beyond the current union structures to better organise class struggle.